FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 12: Capital Budgeting Decisions

Show Answer

Share

---

All types

Filters

Study Flashcards

Question 1

True/False

Review LaterAdd Note

Review Later

The internal rate of return method assumes that the cash flows generated by the project are immediately reinvested elsewhere at a rate of return that equals the company's cost of capital.

A) True
B) False

Correct Answer

verified

False

Question 2

Multiple Choice

Review LaterAdd Note

Review Later

If the new bus is purchased, the present value of the annual cash operating costs associated with this alternative is closest to:

A) $(54,800)
B) $(36,500)
C) $(16,200)
D) $(42,800)

E) All of the above
F) A) and D)

Correct Answer

verified

Show Answer

Question 3

Essay

Review LaterAdd Note

(Ignore income taxes in this problem.)The management of Kinion Corporation is considering the purchase of a machine that would cost $170,000, would last for 4 years, and would have no salvage value.The machine would reduce labor and other costs by $60,000 per year.The company requires a minimum pretax return of 12% on all investment projects. Required: Determine the net present value of the project.Show your work!

A project requires an initial investment of $200,000 and has a project profitability index of 0.250.The present value of the future cash inflows from this investment is:

The profitability index of investment project D is closest to:

If investment funds are limited, the net present value of one project should not be compared directly to the net present value of another project unless the initial investments in these projects are equal.

The net present value of the overhaul alternative is closest to:

(Ignore income taxes in this problem) The management of Penfold Corporation is considering the purchase of a machine that would cost $440,000, would last for 7 years, and would have no salvage value.The machine would reduce labor and other costs by $102,000 per year.The company requires a minimum pretax return of 16% on all investment projects.The net present value of the proposed project is closest to:

A shorter payback period does not necessarily mean that one investment is more desirable than another.

(Ignore income taxes in this problem.)The management of an amusement park is considering purchasing a new ride for $80,000 that would have a useful life of 10 years and a salvage value of $10,000.The ride would require annual operating costs of $32,000 throughout its useful life.The company's discount rate is 9%.Management is unsure about how much additional ticket revenue the new ride would generate-particularly since customers pay a flat fee when they enter the park that entitles them to unlimited rides.Hopefully, the presence of the ride would attract new customers. Required: How much additional revenue would the ride have to generate per year to make it an attractive investment?

Ignoring any cash flows from intangible benefits, to the nearest whole dollar how large would the salvage value of the automated equipment have to be to make the investment in the automated equipment financially attractive?

(Ignore income taxes in this problem.)Mattice Corporation is considering investing $440,000 in a project.The life of the project would be 5 years.The project would require additional working capital of $34,000, which would be released for use elsewhere at the end of the project.The annual net cash inflows would be $123,000.The salvage value of the assets used in the project would be $49,000.The company uses a discount rate of 11%. Required: Compute the net present value of the project.

(Ignore income taxes in this problem.)Bied's Pharmacy has purchased a small auto for delivery of prescriptions.The auto cost $28,000 and will be usable for seven years.Delivery of prescriptions (which the pharmacy has never done before)should increase revenues by at least $25,000 per year.The cost of these prescriptions will be about $18,000 per year.The pharmacy depreciates all assets by the straight-line method. Required: a.Compute the payback period on the new auto. b.Compute the simple rate of return of the new auto.

The profitability index of investment project X is closest to:

(Ignore income taxes in this problem.)Strausberg Inc.is considering investing in a project that would require an initial investment of $270,000.The life of the project would be 4 years.The annual net cash inflows from the project would be $81,000.The salvage value of the assets at the end of the project would be $27,000.The company uses a discount rate of 10%. Required: Compute the net present value of the project.

Some investment projects require that a company increase its working capital.Under the net present value method, the investment and eventual recovery of working capital should be treated as:

Ignoring any salvage value, to the nearest whole dollar how large would the annual benefit have to be to make the investment in the aircraft financially attractive?

The net present value of the alternative of overhauling the present system is closest to:

The net present value of the alternative of purchasing the new system is closest to:

(Ignore income taxes in this problem.)Cardinal Pharmacy has purchased a small auto for delivery of prescriptions.The auto cost $28,000 and will be usable for four years.Delivery of prescriptions (which the pharmacy has never done before)should increase revenues by at least $40,000 per year.The cost of these prescriptions will be about $30,000 per year.The pharmacy depreciates all assets by the straight-line method. Required: a.Compute the payback period on the new auto. b.Compute the simple rate of return of the new auto.